In China, corruption has provided incentives for local government officials in much the same way as methods of compensation in Western economies. There are increasingly good reasons, however, for the Chinese authorities to reconsider their policy of tolerating corruption.

The following story illustrates typical day-to-day corruption in China. When
a junior bureaucrat from Beijing arrived at his new assignment as a middle-level
local official in Sichuan province, his subordinates instructed him in the local
norms for taking bribes. They told him how often he could become
“ill” and how often he could accept invitations to ribbon cuttings,
both occasions at which he could accept “gifts,” without worrying
about being accused of corruption as long as he was politically loyal. Also, he
learned that these gifts could amount to as much as $10,000 a year, which would
be much more than his nominal salary.

As this story illustrates, economic reform in China suffers from an epidemic
of corruption among local government officials. Surprisingly, it seems that
tolerance of corruption together with the threat of punishment has been an
effective way to induce local officials to promote economic reform. Equally
importantly, this system has served the political objectives of the Communist
Party.

There are increasingly good reasons, however, for the Chinese authorities to
reconsider their policy of tolerating corruption.

Although the Chinese have allowed a market economy to develop, they have
retained the existing “personal connections” system of
guanxi, in which relationships with local officials are critical to
ensuring the delivery of raw materials and resources, like electricity and
water. The result has been a dual-track economy, shuang gui zhi.

Corruption has provided incentives for local officials in much the same way
as methods of compensation in Western economies. Local officials who make the
largest economic contribution extract the largest bribes or nepotistic favors.

But why use corruption rather than Western methods of compensation? Important
political considerations work against an incentive system. For starters, the
propaganda of Chinese communism has always claimed that every party member is a
selfless “public servant of the people.” An explicit system of
rewards for local officials would be inconsistent with this propaganda.

In addition, rewards for economic performance would undermine the standing of
those officials and party members who are not involved in economic activities.
Jealousy and discontent, especially in the army, would threaten to destabilize
and to undermine the party’s cohesiveness.

Perhaps most importantly, using corruption as a method of compensation has
enhanced control over local officials by creating a situation in which the party
hierarchy always “has something” on everyone. As an astute student
of China observes: “Because an individual knows that higher-ups could
charge him with corruption at any time, lack of exposure is, in effect, special
treatment for which the official gratefully exchanges his political
support.”

Despite all of the bemoaning of corruption, until recently few corrupt
officials have been punished. Nevertheless, the threat of punishment, used
selectively, has been important. Party authorities have had to deter local
officials from being excessively corrupt – appropriating more than the
amount to which they are entitled. Also, party authorities must show that they
are willing to punish any corrupt official whose political allegiance has become
suspect.

The 15th Congress of the Chinese Communist Party in September
1997, where the party announced its intention to privatize most state-owned
enterprises, was a milestone in China’s accelerated transition to a market
economy. The authorities have apparently recognized that the dual-track system,
however effective in the early stages of reform, is now an obstacle to
China’s further development. Many observers of the Chinese economy are
calling the existing dual-track system the “First Reform,” with the
ongoing and forthcoming large-scale privatization and the prospective entry into
the World Trade Organization being the “Second Reform.”

As the market economy expands, guanxi and the role of local officials
as economic entrepreneurs will become less important. In this transition,
corruption is losing its role as a reward for economic performance and is
becoming instead simply a way of stealing. As a result, in the last few years
the anti-corruption campaign has become more serious. Recently, more government
officials have been imprisoned or even executed for corruption.

The experience of Philippines and Indonesia surely has suggested to Jiang
Zemin, Zhu Rongji and other Chinese leaders that in the Second Reform,
corruption threatens to become a barrier to further economic progress. In
contrast, Singapore, where an autocratic regime employs well-paid, efficient,
and incorruptible bureaucrats, surely provides an attractive model for Chinese
leaders. But, can a large country like China emulate a small city-state like
Singapore? Most interestingly, could the Chinese Communist Party retain its
monopoly on power in a system in which the hierarchy does not always “have
something” on everyone?

Chengze Simon Fan is an assistant economics professor at Lingnan University,
Hong Kong. Herschel I. Grossman is an economics professor at Brown University
and a visiting scholar at the Russell Sage Foundation.